It took too long, but the political system finally appears to be grasping the urgency of this frightening economic moment. With bipartisan support, on Wednesday, the Congress passed and the president signed an initial, scaled-down economic stimulus bill. They’re already working on the next, much larger fiscal installment.
These actions are essential, because while policymakers cannot stave off the deep recession—at least—that’s occurring in real time, they have the tools to partially mitigate the damage and to ensure that there’s an economy capable of bouncing back once coronavirus cases come under control.
To meet the public health threat, the economy must go into some degree of deep freeze. That simple fact makes this an extremely unusual recession. It is not the nature of governments in capitalist economies to instruct their citizens to stop engaging in commerce, but that’s what’s on order. The closest analogy was after the terrorist attacks of 9/11/2001, but that lasted a day or two, and the next thing we heard from the government was President Bush telling us that our patriotic duty was to get on a plane for Disney World.
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A recession is unavoidable and is surely underway, but its length and depth are an open question and malleable. Get this next part right, and we can mitigate some of the inevitable economic pain coming to those people and businesses least insulated against a sudden stop in their incomes. Get it wrong, and the result will be massive layoffs, spiking poverty, evictions, and cascading business failures.
That’s all obvious. But this next part may not be so clear. Once the virus is reined in, we want the economy to be able to bounce back as quickly as possible. One reason for hope on this account is because a lot of the demand that’s currently in deep freeze may thaw when the rate of infections drops—as it has, apparently, in China. Resistance is not futile! But I do not use the “freeze” or “coma” analogies lightly. For us to be able to bounce back, we must preserve businesses, prevent cascading failures, foreclosures, evictions, and more.
This may be distasteful to many Americans who oppose bailing out businesses, like the banks and auto companies in the last crisis, a sentiment I often share. But the patient can’t come out of the coma if she’s ceased breathing, and our policies must reflect this reality.
Getting help to people is a much less contentious political play, one we’re familiar with from past recessions, though in the current case, there’s a new target: someone who is not laid off, but not drawing a paycheck. In fact, over 20 million middle and low-wage workers—about 40 percent of the private-sector workforce, whose average hourly wage is around $14—lack paid leave benefits through work. If they’re forced to be at home because their workplaces are closed, they won’t get a paycheck. And they typically have no savings to fall back on. Their ability to meet their families’ basic needs, most notably rent and food, will be immediately at risk.
Then there’s the much larger group that’s now being laid off. Many will receive a share of their former earnings, typically up to about half, through the unemployment Insurance system.
The bill that just passed the Congress established two weeks of paid sick leave for some of those who lack it at businesses with fewer than 500 employees; an unfortunate, last-minute change in the bill allows businesses with fewer than 50 workers to seek an exemption, as well. It provides states with resources to get their unemployment systems ready for the onslaught, emergency support to help people buy food, and some fiscal help for states, which—unlike the federal government—cannot run budget deficits. But while this hits some of the right notes, it is only a first installment. It probably allocates only about 0.5 percent of GDP, about $100 billion, a fraction of the $800 billion stimulus in the last recession, and the coming recession will probably be deeper than that one.
That’s why it was good news to hear the White House on Wednesday proposed a $1 trillion stimulus, with $500 billion in checks to households. That’s the best way to quickly get resources to the folks who need them, and, in fact, they should target the checks to low- and moderate-income households.
But what about businesses? According to The JP Morgan Institute, 50 percent of small businesses have cash reserves that will last them a mere two weeks. The White House proposal allots $300 billion in low-interest loans to such businesses, with the government absorbing the risk faced by private lenders providing credit in such shaky times. The Federal Reserve also has the capacity to lend indirectly to businesses, by ensuring credit markets remain as liquid as possible.
Democrats have appropriately suggested conditions, such as constraints to executive compensation, stock buybacks, and layoffs, to forthcoming loans and bailouts. The basic guidance to business should be, “If you’re willing to help your workers, we’re willing to help you.” Moreover, there is no reason to prevent every business failure—I don’t think the government can float the entire business sector for very long.
Precisely where to draw these lines will be the stuff of policy debates that are heating up as we speak. But the guiding principles are straightforward: get help fast to those who need it, and make sure that when we’re ready to bounce back from this crisis, there’s still an economy out there to do so.
